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BW Businessworld

We Advise Equity Investors To Make Disciplined And Regular Investments With Long Term Focus

In an interview with BW Businessworld, Harsha Upadhyaya, Chief Investment Officer - Equity, Kotak Mahindra Asset Management Company, talks about equity markets and more

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What’s your broad take on the equity markets at this stage? We’ve been stuck in a frustratingly tight range for nearly 18 months now… Do you see a breakout or a breakdown in the offing? 
In the last couple of months, due to enhanced liquidity flow (especially from foreign institutional investors) and positive sentiments, the market has remained buoyant. Recent upmove has also priced in a strong and stable government. So along with election outcome, corporate earnings trajectory, monsoon and policy initiatives from the new government to ease the liquidity tightness in credit market will be crucial for market direction.

Factors like domestic consumption and auto sales are looking bleak… corporate earnings growth has been tepid as well… does that worry you?
Consumption slowdown is clearly visible. Initially it surfaced in automobiles and other discretionary consumption segments. Now it seems to have spread to some FMCG companies as well. A large proportion of improved earnings expectations for FY2020 incorporates strong numbers from consumer driven sectors as well. Hence, it remains a significant concern.

Are you concerned about prevailing valuations in blue chips? The NIFTY is trading at a P/E ratio of 28-29 times earnings which is well above the historical averages. Do you think that robust earnings growth needs to come through now in order for the market to rally?
The valuations mentioned above are on trailing and stand-alone basis. We generally look at forward multiples on consolidated earnings, based on which Nifty is currently trading close to 20 times. Even on this basis, Nifty is currently trading above historical averages. This also bakes in around 20% yoy earnings growth expectation for FY2020. Hence, a strong earnings trajectory will be critical for any sustained upmove in the market.

Are you concerned about the housing finance market at this stage? And what about Pharma, which has been quite erratic over the last 3-4 months after a brief breakout. Are you bullish on the healthcare sector at this time?

Many housing finance companies are facing tough times due to asset liability mismatch and exposure to developer financing/ land financing. Continued tightness in credit markets is putting further stress on some of these companies.

Pharma sector is broadly facing two major head winds – firstly, USFDA related regulatory overhang and secondly, continued price erosion in US generics space. Until we see improvements on these counts, we would remain underweight on the sector.

What about small caps? Many of them are trading at decent valuations after taking a knockout punch since their 2018 peaks. Is it a good time to start building up positions via SIP’s or STP’s?
The sharp correction in midcaps during 2018 has brought the relative midcap valuation vs the Nifty back to 2014 levels, which was the time when this current leg of the midcap bull run started.  Similar is also the case for small cap valuations vs the Nifty. Another data point suggests that the rolling 1year return difference between Nifty and Nifty Midcap and Nifty Small cap are also at an historical extreme. With the froth in the mid and small cap space now having been wiped out, we would selectively look at investments in quality mid and small cap companies with good managements, healthy balance sheets and high growth. We think investors can build positions in these segments.

Lastly - from an asset allocation standpoint, what would you advise investors right now? Overweight or underweight equities for a moderate risk taker?
While the market may remain volatile in the immediate term due to the concerns mentioned above that are yet to be resolved, it may offer attractive investment opportunities for longer term investors, who are able to withstand likely interim volatility and are patient. Any favourable turn in macro climate and policy initiatives from new government could lead to meaningful upside in the market over medium to long term. We advise equity investors to make disciplined and regular investments with long term focus, and not chase momentum in the market.


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